IRS Letter 226J and the Form W-2 Affordability Safe Harbor (Jan. 27, 2022)

Recently, some business owners who have relied upon the Form W affordability safe harbor for determining whether employer-sponsored health coverage was affordable have received IRS Letter 226J. The letters proposed to impose penalties under IRC Section 4980H(b) for employees who have received a premium tax credit. In some cases, those letters have been issued because the IRS has focused solely on the information reported in the employer's Form W, instead of the employee's overall household income. To ensure that the employer is compliant, these clients should review the amount listed in Line 15 of the employee's Form 1095-C and the amount entered in Box 1 of the employee's Form W to determine whether the W affordability safe harbor is satisfied. Employers who receive a letter denying application of the safe harbor should remember that the IRS may not have checked the employee's overall household income, which is ultimately the relevant amount when determining whether the offer of health coverage is affordable. Employers should make sure to keep accurate documentation to appeal any incorrectly proposed penalties going forward. For more information on Letter 226J, see Q 8875.